Reflections on Life

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Friday, June 15, 2012

Shrieking News: Markets wins dual Nobel Prizes

Friday, 15th June,
2012, Stockholm: THE SVERGIGES RIKSBANK PRIZE in Economic Sciences in Memory of
Alfred Nobel Committee was awarded to “Markets” for 2012. In parallel, the
Nobel Committee has awarded the newly instituted prize in Psychology to Markets
as well.

In a historic joint statement the
two Swedish committees stated, “It gives us great honor to finally recognize
the brilliance of the most esteemed brain of the past and current centuries.
Markets have constantly echoed the sentiments of Markets’ players – investors,
companies, countries, etc. and modeled future expectations of growth and
earnings flawlessly to correctly price each financial instrument for the
greater good of mankind, environment, and animal kingdom (not necessarily in
that order).”

Markets’ players across the world
were naturally elated.

London’s Canary Wharf Nextgen
Traders (CWNT) has extended trading hours today in order to accommodate the
deluge of after-hours trades by retail investors. “Markets were not feeling
well since 2008 when horrid little folks – retail investors, decided to stick
their money into fixed deposits and deprive us CWNTs of our birthright to play
roulette. This recognition by the Nobel Committee changes all that. This will
not only benefit us trader, but also help the world by boosting the moribund
economy with sales of Ferraris and tourism to the French Riviera”, said the
head of the association, the Chief-CWNT.

The credit rating agencies
S&P and Moody’s took the announcement as validation of their ‘AAA’ (top-most)
ratings of Collateralized Debt Obligations (CDOs) and sister alphabet-soup
instruments that were largely blamed for pushing the world economy into
recession in 2008, which has been followed by the anemic global growth till
date. The agencies stated in an unprecedented joint statement that the ratings
were dictated by Markets, and since Markets are perfect, so are the
contributing factors to rate instruments. Thus, the rating agencies were right
all along, it is just that people were too stupid to get it. The two agencies
then promptly downgraded India’s credit rating by a notch due to “perceptions
in the Markets”.

While Markets have finally been
recognized for their standalone brilliance and efficiency the same has not
always been the case.

The British Economist, John
Maynard Keynes, challenged conventional economic thinking in 1930s. He overturned
the older ideas of neoclassical economics that held that free Markets would, in
the short to medium term, automatically provide full employment, as long as
workers were flexible in their wage demands. Keynes instead argued that aggregate
demand determined the overall level of economic activity, and that government
spending was imperative to boost economic activity in times of stress and
active involvement otherwise. During the 1950s and 1960s, the success of
Keynesian economics resulted in almost all capitalist Governments adopting its
policy recommendations.

Friedrich Hayek from the Austrian
School of Economics and Milton Friedman from the Chicago School took the
opposite view. They debunked role of Government in Markets and extolled the
virtues of a free Markets economic system with minimal intervention. This was
the path taken by US President Ronal Reagan and UK Prime Minister Margaret
Thatcher in the 1980’s, and was propped up by the US Fed Chairman Alan
Greenspan in the 1990’s and 2000’s. Markets have marched inexorably forward
(for Markets’ players and backwards for retail investors/ pensioners/ social
welfare).

The ‘Dot Com’ bubble of 2000-01
and the housing market collapse in US seven years later had called this hitherto
“conventional wisdom” of information flow and self-correcting efficiency of
Markets into question, but not anymore.

While the first Nobel Prize in
Economics was expected, Markets themselves were ‘surprised’ with the maiden
Nobel honor in Psychology as well. Experts explained that one without the other
would not have embellished Markets’ battered reputation.

With the current popularity of
Behavioral Economics and its practitioners, the study of economics has been
tied with effects of social, cognitive and emotional factors on economic
decisions and thus, the all-important Markets. The Nobel’s recognition for
Markets in the field of Psychology cuts at the root of the critics of free
Markets who claim that neoclassical economic models do not correctly map the
real world and motivation of both individuals (of the unemployed, optimizing
their spend by precise mathematical models kind) and market players.

Some critics like, Irshad D., a former
business and economics journalist and infrequent sports blogger, remain
unconvinced. “Markets are inherently inefficient,” he states, “and what decades
of complex modeling by highly paid PhDs have tried to do is pretend at doing
away with this very imprecision. That is why a billion dollar trading loss at
an investment bank is explained as a ‘six-sigma’ event, i.e. something that is
so rare that it will happen once in 6800 years. That is the same probability as
of Liverpool winning the English Premier League 3 years in a row, and we all
know that not [sic] happening.”

There doubting Thomas’s within
the Markets’ players as well. Mr. BS (identified by initials only on request of
anonymity so as to not bear the Markets’ wrath), was managing a $14 Bn Hedge
Fund of Funds in 2008. The current value today stands at less than half of
that. While chasing higher returns and beat the Markets, Mr. B along with some
of the industry’s bright lights, put money with Bernard Madoff. “I was just
following what the Markets’ indicators were signaling,” Mr. BS reminisces,
“They told me that Madoff was making phenomenal returns on his funds just by
playing golf in Florida. Now if the Markets did not question that then how can me,
a humble fund manager, who just survives by on 1% management fee and 20% carry,
could have known better?”

Even after Markets worked hard to
bring the world to the precipice in 2008 they did not rest on their laurels.
They then devoted themselves to correcting the underlying economic imbalance by
arguing for a slashing of Government spending and reduction of deficits.

The troubled Euro zone economies,
like that of Greece have followed the above mantra in slashing budgets and
social spending. The net effect has been a decrease in consumer income, confidence
and spending resulting in lower tax receipts, thus widening the deficit further
than reducing it. Clearly the Greeks did not do enough and the double Nobel
Laureate Markets have punished them by demanding higher bond yields on new debt
for following the austerity prescription that the Markets themselves had
prescribed.

Meanwhile, the IMF and World Bank
have come up with a radical proposal for emerging economies. Since the Euro
crises has demonstrated the failure of the elected governments and the hard
work put in by Markets in fixing the same (higher yields and all that), the
emerging economies like, India, should skip ahead of the crises cycle and hand
over their respective countries’ economic governance to the Markets. This is on
similar lines to what the small-government movement is proposing in the US – Government
should be in the business of governance and not regulating business and finance
– that is what the Markets are for. Plans are now afoot to tie in future loans
and funds, both development and economic ones, from IMF/WB to the above clause
as Markets know best.

Despite all the hard work put in
by Markets, they were in the negative globally in the early trading hours of
today.